China Business 2012: Tax incentives make it easier to be green

China is budgeting RMB3.4 trillion (NZ$680 billion) within the next five years on projects to improve its water, air and pollution control. Photo / Kenny Rodger

China, as the world's biggest energy consumer, has set itself a goal of generating 15 per cent of its electricity from renewable sources by 2020. It almost doubled consumer subsidies for renewable-power generation in the second half of last year to $545 million, the most recent period reported.

The report compares regulations, access to capital, availability of land, planning barriers, subsidies and access to the power-delivery grid when determining the ranking, which started in 2003.

China also topped Ernst & Young's attractiveness index for investments in wind power. The Ernst & Young ranking includes 27 countries, with the US Germany, India, Italy, Britain, France, Spain, Canada and Portugal completing the top 10.

China's future growth plans in the renewable energy sector and the wider green space are not only impressive, they offer New Zealand companies growth opportunities along with the ability to qualify for tax incentives in China and tax exemptions here.

The automatic assumption is that China is growing at any cost and this includes not being overly concerned about environmental issues. This is not supported by the facts, says Joanna Doolan, partner in charge of the Ernst & Young New Zealand China Overseas investment network.

The extent of China's commitment to the green sector is budgeted to be RMB3.4 trillion (NZ$680 billion) within the next five years.

These projects are designed around improvements to China's water, air and pollution control together with a focus on reducing emissions, and the prevention of pollution from heavy metals and hazardous chemicals.

China's newly-updated Foreign Investment Catalogue reflects the approach being taken to encourage investment in environmentally-friendly and high-tech projects, including the construction and operation of renewable water plants, R&D as well as manufacturing of new lightweight and environment-friendly materials for aviation and aerospace use and gear transmission manufacturing used for wind power.

New Zealand companies with high tech capabilities operating in the environmental sector have a great opportunity to expand.

There are not just benefits in the form of tax holidays in China; there is also a benefit that will flow from structuring the investments to qualify for New Zealand tax exemptions that result from the active business exemptions for Controlled Foreign Companies.

Most NZ businesses looking to tap into the Chinese renewable energy and environmental protection projects, will need to operate through a wholly owned foreign entity rather than use a representative office. The rules have been updated and the use of representative offices is now very limited.

Florence Wong, leader of the Ernst & Young China New Zealand Overseas investment Group says by planning ahead and using the right structure foreign investors will be able to reap benefits from the Chinese Government's new tax incentives for the renewable energy sector.

A reduced corporate income tax ("CIT") rate of 15 per cent is given for qualified advanced and new technology enterprise.

Applicable sectors include solar energy, wind energy, biomaterial energy, and geothermal energy.

Revenues from certain projects including hydrofluorocarbons, perfluorocarbons, and nitrous oxide projects are eligible for a three-year exemption from Chinese CIT and with another 50 per cent reduction in the following three years.

Further incentives are available to attract technologies and encourage investment in environmental protection and remediation projects.

Three years' CIT exemption is available with another three years' 50 per cent reduction of CIT rate for income derived from qualified environmental protection and energy or water conservation projects. Applicable fields include biomaterial energy, synergistic development and utilisation of methane, and technological innovation in energy conservation and emission.

Tax relief is also available to eligible green companies.. For example, 100 per cent refund of VAT is paid on the sale of biodiesel oil generated by the utilisation of abandoned animal fat and vegetable oil. VAT paid on the sale of goods produced from recycled materials or waste residuals is refundable.

VAT is also exempt on sewage treatment services.

The catalogue includes changes that encourage investment in emerging industries which promote more value-added and technology-based sectors, and discourage investment in projects which could lead to environmental degradation or where sufficient foreign investments already exist.

Meanwhile, if New Zealand businesses establish a wholly owned foreign company in China that is conducting an active business they can qualify for tax exemptions in New Zealand. Previously it was always self-defeating to have a tax exemption offshore only to have the New Zealand tax net take away any benefits you were getting.

The changes to our controlled foreign company rules mean this income is not only able to be earned in China tax-free it can also be repatriated back to New Zealand without further taxes providing it is being paid to a New Zealand company (or similar entity).

You still have the challenge of not having the imputation credits to pay this money out to your individual shareholders, but this is a huge improvement on where we used to be and means New Zealand business can afford to be competitive in offshore markets.